Falling Loan Loss Provisions Boost Bank Earnings To 6 Year Highs

by devteam December 4th, 2012 | Share

Earningsrnof Federal Deposit Insurance Corporation (FDIC) insured institutions rose torn$37.6 billion in the third quarter of 2012, an increase of $2.3 billion or 6.6rnpercent from the third quarter of 2011 and the highest quarterly total sincernthe third quarter of 2006.  The earningsrnwere driven primarily by falling loan loss expenses and rising noninterestrnincome.  Increases were noted by 57.5rnpercent of the reporting institutions; only 10.5 percent reported negative netrnincome, the lowest share of unprofitable institutions since the second quarterrnof 2007.</p

FDIC’srnQuarterly Bank Profile All Institutions Performance report for the thirdrnquarter shows net operating revenue (net interest income plus total noninterestrnincome) increased by $4.9 billion (3 percent) year-over-year with $4.2 billionrnattributed to noninterest income.  Assetrnsales were $5 billion higher than a year earlier and gains from the sale ofrnloans were $3.9 billion (227.5 percent) higher. rnAt the same time banks dramatically cut losses on sales of other realrnestate owned (ORE) to $932 million, a decrease of 81.8 percent.  </p

Provisionsrnfor loan losses fell on an annual basis for the 12th consecutivernquarter.  Banks set aside $14.8 billionrnin the third quarter compared to $18.6 billion one year earlier, a 20.6 percentrnreduction; loan loss provisions represented 8.7 percent of net operating incomerncompared to 11.3 percent a year earlier. rnLoss provisions were reduced by 50.4 percent of all institutions.  </p

QuarterlyrnRevenue and Loan Loss Provisions</p

Insured institutions reduced their reserves for loan losses by $9.6 billionrn(5.4 percent) during the quarter, as net charge-offs of $22.3 billion exceededrnloss provisions of $14.8 billion. This is the tenth consecutive quarter thatrnthe industry’s reserves have declined. Much of the total reduction in reservesrnwas concentrated among larger institutions. The ten largest banks togetherrnreduced their reserves by $7.3 billion (8.1 percent) during the quarter.rnOverall, a majority of institutions (53.5 percent) added to their reservesrnduring the quarter. The combination of sizable reserve reductions with smallerrnreductions in noncurrent loan balances meant that the industry’s “coveragernratio” of reserves to noncurrent loans declined from 60.4 percent to 57.2rnpercent during the quarter. More than half of all institutions (53.4 percent)rnincreased their coverage ratios, but their increases were outweighed by largerrndeclines at many of the biggest banks. </p

Net charge-offs (NCOs) declined by $4.4 billion or 16.5 percent from thernthird quarter of 2011 to a net of $22.3 billion.  NCOs declined in all major categories exceptrn1-4 family residential loans where charge-offs were $1.3 billion or 15.5rnpercent higher than a year earlier. FDIC attributed the increase to newrnaccounting and reporting guidelines applicable. </p

The amount of loans and leases that were noncurrent (90 days or more pastrndue or in nonaccrual status) declined by only $100 million (0.03 percent)rnduring the third quarter. This marks the tenth consecutive quarter thatrnnoncurrent loan balances have declined, but it is the smallest declinernregistered during that time.  The samernaccounting guidance that produced the increase in 1-4 family residential realrnestate loan NCOs also contributed to a $6.9 billion (3.6 percent) rise inrnreported noncurrent loans of this type while most other categories experiencedrnsubstantial declines. </p

Indicators of asset quality</p

Total assets increased by $192.1 billion (1.4 percent) between June 30 andrnSeptember 30, with loan balances rising for the fifth time in the last sixrnquarters. Residential mortgage loans increased by $14.5 billion (0.8 percent).  Loans to individuals increased by $13.1rnbillion (1 percent), led by auto loans (up $7.4 billion, or 2.4 percent). Thernlargest net declines in loan balances occurred in home equity lines of creditrn(down $12.9 billion, or 2.2 percent) and in real estate construction and developmentrnloans (down $6.9 billion, or 3.2 percent). </p

Loan Balances</p

FDIC also reported that 12 insured institutions failed in the third quarter,rnthe smallest number of failures since the fourth quarter of 2008 and the numberrnof banks on the regulator’s “Problem List” fell from 732 to 694 and the assetsrnof listed banks declined from $282.4 billion to $262.2 billion.

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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